Chapter 3 · Money Laundering — Sources and Methods (Typologies)

The model is an analytical framework — in practice, stages overlap and may occur in different orders. But the exam tests the model as taught.

Despite digital finance, cash remains the dominant placement input because it's anonymous, universally accepted, and disconnected from customer identity. Illicit cash generation (drug sales, extortion, unregistered work) creates the placement problem — get it into the system without triggering CDD or reporting thresholds.

Both terms refer to breaking a large cash deposit into smaller amounts BELOW the reporting threshold — but they differ in method:

Both are federal offences in most jurisdictions (US: 31 USC §5324; UK: caught by POCA principal offences).

Businesses that legitimately handle large volumes of cash provide cover for launderers to intermingle criminal cash with legitimate takings. High-risk types:

• Bars, restaurants, nightclubs
• Car washes, laundromats
• Nail salons, hair salons
• Scrap-metal yards
• Vending machines, arcades
• Cash-based construction subcontractors

Red flags: turnover disproportionate to visible activity, few or no card transactions, minimal supplier invoices relative to reported takings.

Physical movement of currency across borders. FATF Recommendation 32 requires declaration systems for cross-border cash / bearer negotiable instruments above a threshold (typically €/$10,000 or equivalent).

Enforcement via customs — cash detection dogs, X-ray, currency-declaration forms. Undeclared amounts are subject to seizure and forfeiture.

Wire transfers are the dominant layering tool because they move value fast, across borders, in the regulated system. FATF Recommendation 16 (the "Travel Rule") requires originator + beneficiary info to accompany transfers — see [[Ch 7]] for crypto extension.

Techniques: rapid multi-jurisdiction transfers, currency conversions to break audit trail, use of correspondent accounts, transfers just below CDD thresholds.

Correspondent banking: Bank A (correspondent) provides banking services to Bank B (respondent) — typically account, USD clearing, wire routing. Historically enabled global commerce; now a documented ML risk channel because the correspondent doesn't see the respondent's underlying customers.

FATF Rec 13 requires enhanced CDD for correspondent relationships:

• Understand respondent's business + AML controls
• Assess quality of respondent's supervision
• Establish responsibilities of each party
• Senior management approval to onboard

Wolfsberg CBDDQ (Correspondent Banking Due Diligence Questionnaire) is the industry-standard tool for gathering this info.

A shell bank is a bank with no physical presence in its country of incorporation and no affiliation to a regulated financial group. FATF Recommendation 13 prohibits correspondent relationships with shell banks — and requires firms to ensure their correspondents don't allow accounts for shell banks.

Historically used for laundering; the FATF ban (in place since 2003 recommendations) has largely eliminated open shell-bank correspondent access.

Nested correspondent banking: Bank C uses Bank B's correspondent account with Bank A. The correspondent (A) sees traffic from B but not from B's customer (C). C effectively "piggybacks" on B's account.

Risk: A has no direct KYC on C. If C is a high-risk institution or a poorly-supervised jurisdiction, A carries residual risk without visibility.

Enhanced controls: require respondent to disclose downstream correspondents, screen for red flags, monitor for unusual patterns from B's account.

A shell company has legal existence but no substantial operations, no employees, and minimal assets. Not illegal in itself — used for legitimate purposes (holding IP, ring-fencing joint ventures, tax planning). Becomes an ML vehicle when it:

• Obscures beneficial ownership
• Routes funds without economic substance
• Uses nominee directors / shareholders
• Is incorporated in a low-transparency jurisdiction

Journalistic leaks that reshaped global BO transparency policy:

• Panama Papers (2016) — 11.5m documents from Mossack Fonseca; exposed 200k+ offshore entities
• Paradise Papers (2017) — Appleby, similar scope
• Pandora Papers (2021) — 12m documents; multiple offshore providers; heads of state exposed

Policy response: BO registers (EU 4MLD, UK PSC 2016, US CTA 2020), Register of Overseas Entities for UK property (2022), increased sanctions on enablers.

Public registers requiring companies to identify their beneficial owners. Landmark examples:

Trusts separate legal ownership (trustee) from beneficial ownership (beneficiary) — legitimate uses include estate planning, charitable structures, asset protection. Also used to conceal true beneficial ownership.

Trust and Company Service Providers (TCSPs) — firms that create/administer trusts and companies — are FATF-designated DNFBPs (Designated Non-Financial Businesses and Professions) subject to full AML obligations. UK: registered with HMRC.

Trade-based money laundering: disguising the proceeds of crime + moving value through legitimate trade transactions, principally by misrepresenting the price, quantity or quality of goods.

Common techniques:

• Over-invoicing — importer pays exporter more than goods are worth; excess = laundered value
• Under-invoicing — reverse; value hidden in cheap invoice
• Multiple invoicing — same shipment invoiced multiple times
• Phantom shipments — invoice for goods never delivered
• Misdescription — invoice claims high-value goods; low-value goods shipped

TBML is arguably the largest under-detected ML channel because:

• Individual trade transactions are small vs global trade volumes (~$25tn/year)
• Trade finance often uses paper documents (letters of credit) — hard to cross-check
• Legitimate price variation across markets provides cover
• Multi-jurisdictional — requires cross-border data sharing
• Free trade zones + special economic zones add opacity

Wolfsberg Trade Finance Principles + FATF Trade-Based Money Laundering guidance are the reference frameworks.

Free trade zones (FTZs) offer relaxed customs oversight to promote trade — but that same relaxation makes them TBML magnets:

• Goods re-labelled, repackaged without full customs scrutiny
• Ownership of goods can change hands multiple times inside the FTZ
• Weak beneficial-ownership requirements historically

Notable examples: Jebel Ali (UAE — Dubai's largest FTZ, subject to reform post-2022 grey-listing), Colon (Panama), several Chinese special economic zones.

Real estate is a favoured integration vehicle: high absolute value per transaction, socially legitimate, appreciates over time, offers physical utility. High-value residential markets in London, New York, Sydney, Dubai, Singapore are documented targets.

Structures used: shell companies as buyer, offshore trusts, cash purchases at auction, purchases by nominees with side-agreements.

Enacted under the Economic Crime (Transparency and Enforcement) Act 2022 — a rapid post-Russia response. Requires overseas entities that own or acquire UK property to:

• Register with Companies House
• Disclose beneficial owners (25%+ threshold)
• Update annually
• Fail to register → can't sell/mortgage the property; criminal penalties

Impact by 2024: 30,000+ entities registered; several thousand refusals to register triggering property freezes.

Dealers accepting cash payments ≥€10,000 are subject to AML obligations (MLR 2017 in UK — supervised by HMRC). Includes:

• Jewellers, precious-metal dealers
• Art dealers (also captured by 5MLD extension)
• Yacht + private aircraft dealers
• Prestige car dealers
• Auction houses